Axios, citing an official, reported that the US and Iran have agreed to halt more than three days of retaliatory strikes in and around the Strait of Hormuz, and to resume technical talks on Tuesday in Qatar. Earlier efforts to end the US war with Iran were reported to be stalled after the US struck Iranian military targets, following Tehran\u2019s latest attacks on shipping in the Strait.<\/p>\n\n
The Islamic Revolutionary Guard Corps said it had destroyed eight US military sites in Kuwait and Bahrain in response to recent US attacks on Iranian facilities, while Washington said a late-Saturday wave of Iranian drones and missiles failed to hit intended targets. Iran\u2019s Foreign Minister Abbas Araghchi stated the Strait of Hormuz would remain under total Iranian control for the next 30 days, as US President Donald Trump accused Iran of violating a memorandum of understanding and threatened further military action. Markets opened Monday in a risk-off stance, lifting the US Dollar Index (DXY) and WTI crude.<\/p>\n\n
With talks in Qatar scheduled for this Tuesday, the situation remains extremely fragile. We see this as a clear signal to buy volatility, as any negative headline could cause significant price swings. We are therefore increasing our long positions in VIX call options, anticipating that the index, which has been hovering near 14, could easily spike above 20 as it did during similar geopolitical flare-ups in early 2020.<\/p>\n\n
The direct threat to the Strait of Hormuz, through which nearly a fifth of the world’s daily oil supply travels, puts crude prices at the forefront. We are buying near-term WTI and Brent call options to capitalize on a potential supply shock if negotiations falter. Historically, incidents in this region have caused immediate price jumps, such as the 14% surge in a single day following the 2019 attacks on Saudi facilities.<\/p>\n\n
This uncertainty is driving a flight to safety, strengthening the US dollar. We are positioning for the DXY to test its recent highs as capital flows into US-denominated assets. This move is consistent with risk-off periods where the dollar acts as the primary safe-haven currency.<\/p>\n\n
The broader equity markets are vulnerable to rising energy costs and geopolitical risk. We are hedging our long portfolios by purchasing puts on the S&P 500 and are selectively looking at call options on defense sector ETFs. Airlines and industrial stocks that are sensitive to fuel prices are likely to underperform in this environment.<\/p>\n\n
Over the next few weeks, our strategy will be defined by the 30-day window Iran has mentioned. We are using options spreads to define our risk, as the elevated implied volatility makes simply buying options expensive. This allows us to maintain upside exposure to energy while capping our potential losses should a lasting diplomatic solution be found.<\/p>\n\n\n\n